A review of the provisions introduced reveals that after a long period of time, concrete and positive steps have been taken to document the economy and provide a level playing field for various people in business.
All the steps are almost in the right direction which reflect the government’s willingness to document the economy and bring delinquents into Pakistan’s tax system.
These changes will help document the economics, access and use of data otherwise available in the (NADRA) system for tax purposes, empowering the tax department to terminate the availability of public services for offenders. These steps lead to the interconnection of tax data and the information base with the country’s economic activity.
While almost all of these measures are correct and have been rightly introduced, care should be taken to ensure that these measures do not create an additional burden for comparatively more documented businesses (such as businesses) compared to non-business cases. companies.
In addition, measures should be introduced to reduce the prevalence of “cash economy” in the country, including the prohibition of instruments facilitating cash transactions. If measures to reduce the size of the money economy are not taken, then based on past experience, these measures may become counterproductive. These measures include the phasing out of high currency denominated banknotes and restrictions on the easy availability of foreign currency in the country.
Mandatory digital payment of business expenses:
This is a very controversial amendment to tax laws for the documentation of the economy.
The government should reconsider this provision as it effectively delegitimizes check payments over a certain amount.
It is common knowledge that there are a substantial number of unreported bank accounts through which huge business transactions are undertaken without the tax system being reflected. The amendment now proposed is the continuation of the old one introduced by the finance law for 2021. In the previous amendment, all entities are required to report the bank account used for business purposes.
Companies are now required to make all payments for expenses over a certain limit (250,000 rupees) only through “digital transactions” made to a bank account notified to the tax office.
The conditions are:
• Transactions under the same account manager exceeding Rs. 250,000;
• Digital payment method by declared bank account.
It would be desirable for companies to have the possibility of paying digitally or by cross checks instead of being forced into digitization.
The term “digital transaction” has not been defined in the Income Tax Ordinance, however, a digital transaction usually means:
“A digital payment, sometimes referred to as electronic payment, is the transfer of value from one payment account to another using a digital device such as a mobile phone, point of sale (POS) or computer , a digital communication channel such as mobile wireless data or SWIFT (Society for the Worldwide Interbank Financial Telecommunication). This definition includes payments made by wire transfer, mobile money and payment cards, including debit cards. credit, debit and prepaid.
It appears that banking transactions made by means of checks would not qualify under this section. The procedural aspects relating to the digital payment system need to be clarified as the proposed system envisages a complete replacement of the current method of payment which is made by checks.
It is a step forward in the modernization of the financial system and its use for the documentation of the economy. However, the legal implications of this step must be considered in determining whether a payment system approved under the legally permitted payment method can be ignored under tax laws. In addition, this amendment may lead to the promotion of unincorporated business entities.
It is recalled that this amendment follows on from another important amendment made by the 2021 finance law by which the declaration of corporate bank accounts was made compulsory.
Collaboration with NADRA & Indicative Revenue
The National Database and Registration Authority (NADRA) is the national repository for data and transactions made by an individual. This data is kept in NADRA for each Pakistani citizen on the basis of Computerized National Identity Cards (CNIC).
A new system of collaboration and use of data between NADRA and that available from the Federal Board of Revenue (FBR) has been introduced into the tax laws.
As part of a well-organized system, substantial data relating to various transactions made by an individual is available with NADRA. This is so because almost all major economic transactions, such as registering the acquisition of goods and assets, opening a bank account, booking and registering motor vehicles, etc., require the identification of CNICs under the respective laws. The resources available with NADRA would now be available for FBR as part of an organized system.
Under the newly inserted Section 175B, certain roles have been assigned to NADRA, including:
• Identification of income, receipts, assets, goods, liabilities, expenses or transactions that have escaped the assessment; and
• Identify differences in valuation of the underlying object of the transaction.
A new concept for determining “Indicative Income” has been introduced.
As part of this process, NADRA using artificial intelligence, mathematical or statistical modeling or any other modern device or calculation method can determine the indicative income of any individual based on the data available from NADRA. This is a unique strategy that has not been tested in other jurisdictions.
However, in our particular environment, such action is essential.
This indicative income will be communicated to the person through the RBF, which will in effect be regarded as a deemed modification of the declaration filed under the self-assessment system as defined in Article 120 of the Ordinance on 2001 income tax.
In the event that the person has not filed a return, this indicated income will effectively be deemed to be the tax liability of that person.
This is a very positive step as it is common knowledge that there are many economic transactions that are not reflected in the tax system.
In addition, in various people, the economic transactions reflected in the NADRA records are not proportional to the reported income.
In order to properly implement an essential step, it is recommended that adequate measures be taken to avoid unnecessary disputes that should arise on this matter. Offenders are expected to put barriers in the implementation of this provision; contest the validity of these indicative revenues. This requires very close coordination between NADRA and FBR and the use of the “reasonableness” test when determining indicative income as mentioned above. A cautious, constructive and transparent approach is suggested. It must be established in all respects that the function of determining income rests exclusively with FBR. NADRA data or database is only an aid to RBF.
Disconnection of public services for delinquent persons
A new section has been added to the tax law by which FBR has been given powers that result in the disconnection of public services for people failing to file the tax returns required under tax laws. These utilities include cell phones or cell phone sims, connection to electricity and gas. This section will have a very broad implication for Pakistani society because the number of users of cell phones, electricity and gas connections (commercial and industrial) is absolutely not up to the people filing taxes.
Adequate provisions will be required in the respective laws for the implementation of the aforementioned provisions. In addition, a close, coordinated and integrated agreement will be necessary between the entities providing these public services (such as nightclubs, SNGPL and SSGC and mobile phone companies) for the implementation of this adequate and appropriate law.
It is important to note that there is a provision of Article 181 AA of the Income Tax Ordinance, 2001 which requires that new registrants of a new commercial or industrial connection must be registered with the service. taxes. This provision, introduced in 2014, has not been implemented in practice and there is no coordination between electricity and gas suppliers and the tax service.
Now such a strong provision has been introduced which results in the disconnection of the public service. It is suggested that appropriate preparation be made for the implementation of this provision of law if necessary with the support of nightclubs and gas companies.
Foreign remittances through bank channels up to 5 million are not subject to any tax investigation. This facility was limited to remittances through banks only. From now on, remittances other than those from banks such as Money Service Bureaus (MCBs), Currency Exchange Companies (EC) and Money Transfer Operators (MTO) will also be eligible for such a concession.
It is suggested that adequate procedures be introduced to ensure that there is no abuse of this concession and that at the same time adequate documentation is available to avail of this concession.
Discontinuing the collection of electricity and gas – Registration of sales tax
Under the new provision introduced in the Sales Tax Act 1990, the FBR was empowered to disconnect the connection to electricity or gas if a person who is to be registered under the Sales Tax Act 1990 sale is not.
In practice, this provision is the most relevant amendment to Pakistan sales tax law after 1996.
It is a known fact that there are a very large number of people not registered under sales tax laws.
There are about over 400,000 industrial or commercial people in the country while the number of people registered under sales tax laws is about a quarter of that number.
It is a step in the right direction. In the past, serious implementation problems in this regard have been encountered due to the practical non-cooperation of nightclubs and gas companies. Good governance must avoid the repetition of this trend.
On a practical level, the government as a policy should consider the following steps for the proper implementation of this provision:
• An adequate period of time for the integration of the recordings and the correction under the respective laws;
• An exemption from liability for transactions for the period when those persons were not registered who opt for voluntary registration.
This also applies to level 1 retailers, although being registered does not integrate with the Commission’s computerized system.
Copyright Business Recorder, 2021